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Published On: Mon, Oct 1st, 2018

Ecobank: Tough times and battle for survival

Patrick Akinwuntan, CEO, Ecobank Nigeria

By TESLIM SHITTA-BEY

Depressed demand and a drop in local consumer spending have combined to squash top line earnings for continental banking giant, Ecobank Trans International, for the half year ended June 2018. ETI’s results for the first six months of the year show a one per cent dip in the bank’s top line earnings, which slipped from N386.8billion in half year (H1) 2017 to N384.6billion in H1 2018.

However, the banks profit figures went in the opposite direction with a 37 per cent rise profit after tax (PAT), from N37.7 billion in H1 2017 to N51.6billion in H1 2018.  ”Ecobank looks like it is back to winning ways even if its books are a little ambivalent”, says Oluwarotimi Ogunwale, a financial analyst and former Chief Operating Officer (COO) of Imperial Finance and Investments Limited.

He notes that even though a clutch of local banks have had to trim down profit margin expectations and slash earnings projections as they accommodate lower impairments, they still look strong. According to Ogunwale, ”the banks have found themselves between a cushion and a hard place, lower impairments have helped to improve bottom lines, but slower top line earnings growth have kept average profits depressed”, he says.

In respect of ETI, the bank has had to deal with a myriad of problems, one least talked about was that of its erstwhile Managing Director, Charles Kie, who found it difficult to navigate the local ecosystem and who, according to some commentators, rubbed big wallet customers, especially public entities, the wrong way . His lack of knowledge of the local market and his alleged imperious disposition to customer relation prevented the bank from building a stronger portfolio of premium customers.

Despite this, the banks half year result shows that its net interest income grew by a marginal 3 per cent from N142.7 billion in H1 2017 to N146.6 billion in H1 2018. This can be attributed to slower growing loan assets (they fell 6 per cent between H1 2017 and H1 2018) and a sluggish fall in interest costs which slid 4 per cent between both half years. Net interest margin (a measure of how profitable a bank is in its core lending activity) leaped a bit from 5 per cent in H1 2017 to 5.5 per cent in H1 2018. According to Chuks Okenwa, financial analyst at the Investment Centre, “the bank found its earning rhythm in H1 2018 but much of this  must be credited to the 37 per cent fall in its loan impairment charges; this has been good for short term asset quality but worrisome  for top line growth”. Indeed according to observers, going forward, little more can be squeezed from impairment charges as fewer risk assets will yield themselves to immediate recovery. The pace of impairment charge reduction in the third and fourth quarters is expected to drop as manufacturing, wholesale, and retail companies find it increasingly difficult to meet their sales targets in an environment of weak consumer spending.

Regardless of the problems of a slower growth in the service sector and sliding consumer spending, ETI has improved asset quality as the ratio of impairments to loans and advances outstanding fell from 0.018 in H1 2017 to 0.013 in H1 2018; a decent bootstrapping of the bank’s credit portfolio. The bank’s loans to liabilities ratio fell marginally from 0.65 in H1 2017 to 0.61 in H1 2018, a 6 per cent plunge, suggesting a more conservative approach to balance sheet management on the part of bank executives. This may, understandably, hurt profitability but also ensure operational stability and liquidity.

According to external figure crunchers, a major reason why ETI’s year on year earnings has been so impressive has been a substantial 288 per cent rise in the bank’s financial trading assets which skipped from N11 billion in H1 2017 to N43 billion in H1 2018, despite a 6 per cent fall in the bank’s loan asset portfolio which put a mild squeeze on net interest income which went up by a skinny 3 per cent between 2017 and 2018. ”With net interest income (a measure of  ETI’s profitability in core business activity) rising marginally by a meager 3 per cent, the 37 per cent growth of its bottom line year on year looks a bit contrived”, notes Abiodun Fatana of  Kapital One, a Lagos-based investment advisory firm.  According to Fatana, ”fees and other operating incomes were big ticket profit items for ETI in H1 2018, suggesting that a lot of the bank’s improvement in its bottom line came from balance sheet items outside its core lending business; encouraging a snoop into what the bank’s ‘other operating incomes’ as well as ‘fee income’ are really made of, a task worthy of legendary British detective Sherlock Holmes!”.

Unfortunately Holmes is not an option, but digging further into ETI’s books clearly shows that tighter investment management has slowly turn around the fortunes of the commercial money lender.  Indeed, most of ETI’s ‘other operating incomes’ were produced by sundry activities that were unclearly specified in the books. The sub head simply explains that the line item grew from N3.03 billion in H1 2017 to N5.32 billion in H1 2018, or what amounts to a 76 per cent surge in revenue. The bank equally made a bundle from cash management services with revenues from this service going up by 20.3 per cent from N11.33 billion in H1 2017 to N13.63 billion in H1 2018.  The banks net total fee income climbed from N69.28 billion by half year 2017 to N77.25 billion in 2018, a growth of 11.5 per cent. In general ETI did a good job of growing its fee-based income as a proportion of its gross earnings. However, the fact that loans and advances have dropped 6 per cent, has lead analysts to fear a potential fall in the bank’s operating income by year ended December, 2018.

But anxiety over profit performance is less of a problem in the area of corporate leverage. ETI’s debt to equity ratio of 1.2 (H1 2018) is quite modest and shows a robust capacity to grow its balance sheet through more debt liability of a longer term nature. ”If you are going to eat a frog”, says Investment centre’s Okenwa, ”eat the biggest first, Ecobank needs to determine the expected strongest growth sectors of the economy and increase its leverage in line with this trend as long as medium to long term sectorial outlooks are bright”.

The strategy could work but it could also fall flat on its nose as was witnessed when banks increased their lending exposure to the oil and gas sector and the emerging power sector. Philip Chukuma of Digital Finance, a fintech company, notes that, ”getting high on the latest sector fads may look great at first blush, but if the bet falls through you could land flat on your pant seats”. ETI has so far managed to avoid this, even though the bank is not without internal concerns about accumulating pension liabilities and outstanding legacy acquisition problems. The swallowing of big frogs such as Oceanic Bank and Equity Bank has given it an ability to grow assets quickly and broadly, ”but that has come with its own unique problems” notes Jubril Aku, former Managing Director of the bank and Chairman Sun Trust Bank. According to Aku, “In growing balance sheet at a rapid pace and within a short time span, you get the glow of a stronger set of numbers but the pain of a bigger provision for loan impairments, sustainability is a delicate balance between both”, he says.

Aku observes that ETI had to look at a broad expansion strategy that would either be organic but slower, or inorganic but a lot faster, eventually it plumbed for the latter and has had to cope with the unintended, but not totally unexpected, fall outs. ”We knew that faster growth by way of acquisitions will throw up its own peculiar challenges but given the competitive pressure of the environment at the time it was the smartest way to go. Interestingly, the earlier problems are being handled competently and the bank from its past half year 2018 presentation is looking good to consolidate its expansion in favour of different stakeholders”, he insists.

Apparently Nigeria’s city centre money lenders are coping with unusually tough times as the economy struggles for a more stable recovery from a 2016 recession, whether this will happen or not is actually out of their hands as a lot will depend on fiscal and monetary policy for the last two quarters of the year. Nevertheless, ETI has managed to drag itself from what looked like a corporate slide to a faster-paced earnings growth how sustainable this is will depend on the banks new management led by home boy, Ade Adeyemi, its new Managing Director.

The banks stock price has settled at N18.50 (September 21, 2018) on a one year price yield of 2.78 per cent and a price earnings (P/E) multiple of 5.98 or a 36 per cent discount from the All Shares Index (ASI) P/E of 9.3. Going forward investors may take advantage of recent market sell offs to buy the stock at hidden value.

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